Tesco, Sainsbury's and Morrisons have fueled their own downfall by opening
convenience stores, and only now are they reacting

The managers of Tesco supermarkets across the country have an unpleasant week ahead of them. Tomorrow , they will begin talks with their staff about a dramatic revamp of the workforce

A briefing document obtained by the shopworkers’ union Usdaw shows that store managers have been briefed to tell staff that the changes “will support our ambition to be a much simpler and leaner organisation, with a single-minded focus on customers”.

The revamp is part of Tesco’s plan to cut up to 10,000 jobs in the UK. It promises to be a brutal process.

The changes involve stripping out an entire layer of management at Tesco’s supermarkets, although Tesco Metro and Tesco Express stores are not affected.

The cuts demonstrate that Britain’s supermarkets remain under severe pressure. Despite industry figures from Kantar showing an improvement in sales, profits have been eroded.

Last week, Andy Clarke, the chief executive of Asda, let rip at the grocer’s rivals Tesco, Sainsbury’s and Morrisons. He accused them of resorting to “quantitative easing” and “unsustainable” tactics to attract shoppers, including vouchers that offer a £10 discount on every £40 spent.

However, alongside his outspoken criticism of Asda’s rivals, Clarke also said something about Asda’s own strategy that was even more eye-catching.

The retailer, which is owned by Walmart, plans to spend £600m this year opening 17 news stores and revamping others. Given the slump in sales for the “big four” supermarket retailers, this appears a statement of intent. But Clarke doesn’t think it is that dramatic. “Retail stores, of whatever size, still have a place in this market,” he said. “The majority of people still want to do a weekly shop in a store.”

Asda was the best performer out of the big four in 2014 – by sales and profits. This was despite the fact that it does not have any convenience stores, supposedly one of the fastest growing parts of the market.

In contrast, out of the 43 shops that Tesco has announced it will close, 18 are Tesco Express convenience stores and 12 are small Tesco Metro urban stores. Morrisons has also closed around 10 convenience stores and more closures are likely.

Asda’s expansion plan and these closures suggests that despite the slump in sales for Britain’s biggest food retailers, the weekly shop and the out-of-town supermarket aren’t dead yet. Indeed, convenience stores – which have been hailed as central to the future of grocery retail – may be part of the problem for the industry.

They have become a new battleground. Figures from the commercial real estate company CBRE show that the big four grocery retailers now run almost 3,500 convenience or small stores, such as Tesco Express, Tesco Metro, Sainsbury’s Local and M Local. This compares with 2,500 traditional supermarkets.

However, there is evidence that in the rush to open smaller stores, companies have cannibalised their sales and damaged profits.

According to Richard Hyman, a retail consultant: “Online is about 6pc of the market and convenience is much bigger. Online is a sexy topic that everyone wants to talk about, it is presented as the greatest disrupter we have ever seen in retail. But the convenience store and its growth has been a bigger disrupter. It has encouraged a change in shopping habits. It is enormous. It has encouraged people to fragment their shopping.”

Hyman’s argument is that by opening convenience stores on high streets and next to stations, the big four have encouraged Britain to shop little and often for groceries, rather than buy lots of food in one weekly shop and potentially waste some of it.

Many families now use convenience stores to buy their meal for that evening, shop in a supermarket for non-perishable foods and toiletries, and then pop into the discounters Aldi and Lidl for bargains.

Hyman says that the big four were right to open convenience stores, but that their error was not to realise the impact this would have on supermarket sales. He said they have “unwittingly been the architects of their own market share declines”.

He added: “What is a terrible indictment, a symbol of the turmoil that the big four find themselves in, and a demonstration of how myopic management teams can be, is that they did not understand the impact on their business model of this change in shopping habits. They carried on building large stores as if nothing was happening.”

Source: CBRE, PMA, Retail Locations

Illustrating Hyman’s point, since the financial crisis Tesco has built a new store estate equivalent to the total size of Morrisons, but its market share has declined.

Research from CBRE also demonstrates the strain from convenience stores.

It found that since 1996, the number of convenience stores run by the big four has trebled. It also warned that because the range of products in a convenience store can be 10pc of that in a large supermarket, it can take 10 to 15 convenience stores to equal the sales of a supermarket.

On top of the challenge that convenience stores pose to supermarkets is the challenge of running convenience stores themselves.

The smaller shop means that if a retailer gets the product range wrong – such as by misreading the local community – it can have a devastating effect on sales. Running costs are also high because of the challenge of delivering to a small property often located on a busy high street.

Competition for the best sites is ferocious. The best locations are those with consistent footfall, such as on high streets and next to train stations, but even being on the wrong side of the road can be damaging.

Morrisons was behind the curve in opening convenience stores and tried to catch up by buying sites in bulk from companies that had collapsed, including Blockbuster, and Jessops. However, the company has discovered the hard way that operating convenience stores is very different to supermarkets. Morrisons has announced the closure of stores and Andy Higginson, its new chairman, has said he now wants the company to focus on its supermarkets.

Nonetheless, Morrisons’ rivals are still looking to expand. Convenience stores offer attractive returns from an investment point of view because they are far cheaper to open than an out-of-town supermarket.

Adrian Hanley, a director in CBRE’s supermarket agency team, said that Tesco and Sainsbury’s are still likely to open roughly 100 convenience stores each this year. “I think [convenience stores] have driven new sales,” he said. “All sales have not been taken from supermarkets.”

According to Hanley, the problematic convenience stores are those that opened a decade ago. This is because it is “much easier for a competitor to open near” to a convenience store than to an established out-of-town supermarket. “What may have been a great pitch 10 year ago may have become saturated today,” he added.

However, as the problems for the big four’s supermarkets show, even when convenience stores are performing well, there are consequences.